Introduction to BusinessBUS& 101

Olympic CollegeProfessor: Alan M. Ward

Chapter 1

Managing within the Dynamic Business Environment:

Taking Risks & Making Profits

Chapter 1 – Learning Goals1. Describe the relationship of firms’ profit to

risk assumption and discuss how firms & nonprofits add to the standard of living & quality of life for all.

2. Explain the importance of entrepreneurship to the wealth of an economy.

3. Examine how the economic environment and taxes affect businesses.

4. Illustrate how the technological environment has affected firms.

Learning Goals – continued

5. Identify various ways which firms can meet & beat competition.

6. Demonstrate how the social environment has changed & tell what the reaction of the business community has been.

7. Analyze what firms must do to meet the global challenge, which includes war & terrorism.

8. Review how trends from the past are being repeated in the present & what such trends will mean for the service sector.

The Seven Decisionsby Andy Andrews

1. The Buck Stops Here.2. Seek Wisdom: Let other help guide you.3. I am a person of action.4. I have a decided heart.5. Today, I will choose to be happy.6. I will greet each day with a forgiving spirit.7. I will persist without exception.

Business & Entrepreneurship:Revenues, Profits & Losses

The Profit Table: A Way to do Marginal Analysis

Example 1_ Example 2_Revenue: $1,000,0000 $2 billion

- Cost $900,000 $2.1 billion=====================================================================

Profit/Loss $100,000 -$100,000

Matching Risk with ProfitTypes of Risks:

Political Interest RateCredit CurrencyInflation SectorLiquidity Legislative Principal CallReinvestment Default

Price Market

http://www.uwf.edu/rconstand/5994content2003/T4-RiskReturn/T4-riskreturnP02.htm

Gauge Your Risk Tolerance

Imagine you are about to purchase your retirement condo on the beach.

You have the selection of any suite in the development from the ground floor to the penthouse.

Which would you select, and why?

Risk tolerance:Is the Reward worth the Risk?

Standard of Living/Quality of Life

Standard of Living: related to the amount of goods & services people can buy with the money they have.

Quality of Life: related to the general well-being of society in terms of political freedom, a clean environment, health care, safety, free time, & every else that leads to satisfaction & joy.

How much you have minus how much you owe? If you had no debt would your quality of life improve?

Responding to Stakeholders

Owners/Stockholders BankersCustomers SuppliersSurrounding Community EmployeesGovernment Leaders DealersEnvironmentalists

U.S. Small Business

Yearly, 1:12 U.S. citizens tries to start a business.(US workforce = about half the US population)

1:6 workers tries to start a business each year.

Half of all businesses close in 5 years.

Why do people want to start their own business?

Why People Start a Business

Chance to make more moneyRun their own enterprise (be the boss/decision-

maker; to do it their way.)Freedom from … or to…Control their time and payLeave a legacyReach a personal/financial goal

How they get started

Business Owners Must:Understand their business/competitionUnderstand their market/potential customers

a good reputation and quality service is valuableUnderstand the cost/commitment of successUnderstand that serving more people earns them

more money & builds their businessEveryone has the same amount of time: 24/7/365Profit is what allows you to stay in business

Business in Nonprofits(and for Profit Business)

Setting Goals & Dividing ResponsibilitiesWorker RelationsPublic Good Will: StakeholdersResource ManagementGrowth of OrganizationDecisions & Policy Formation

Entrepreneurship or a J O B

JOB = Just Over Broke

Working for someone else: They take the risk.Who gets the bigger paycheck?

EntrepreneurshipWorking by yourself (self-employed), or work

with others; the efforts of others help you.Lead others, Train others, or Assist others.

Opportunities For Entrepreneurs

Employee Business Owner

Self-employed Investor

The Cash Flow Quadrant from Robert Kiyasaki

The Importance of Entrepreneursto the Creation of Wealth

Factors of Production: C.E.L.L. + K.I.T.1) Land2) Labor3) Entrepreneurship4) Capital*Knowledge, Innovation, Technology

Global Business Environment

Economic & Legal Environment

Technological Environment

Competitive Environment

Social Environment

Technology

Productive CapacityEffective use of Factors of Production

Efficient use of Factors of ProductionProductivity: per worker hour

Specialization & Division of Labor

Growth of E-commerce

AdvertisingProduct SalesCustomer Service

Electronic DatabasesIssue: Identity theft

SSN & CC#

Competitive Environment

Monopoly: one firm controls supply & price

Oligopoly: few firms compete for market shareprice & decisions of one firm affects others;when 4 largest firms control 40% of the market

Monopolistic Competition: differences in similar products limit substitution: quality, style, etc. Firms have some control over price.

Perfect Competition: many buyer & seller; no one buyer or seller has much affect on price.

Traditional versus World-Class Businesses

Customer SatisfactionCustomer OrientationProfit OrientationReactive EthicsProduct OrientationManagerial Focus

Delighting the CustomerCustomer & Stakeholder

OrientationProfit & Social OrientationProactive EthicsQuality & Service

OrientationCustomer Focus

Social Environment

Baby Boomers 1946-64

Boomer Echo 1971-89

Gerber & Disposable Diapers

Mattel & Hasbro 1950-60s

Schwinn 1960s

Cars & Homes 1970-80s

Investments 1990sRetirement 2011+

As America Ages

• Social Security – a pay as you go system

• In 1940: 42 workers supported each retiree

• In 2018: More going out than coming into

• Social Security; 3:1

• Since 1985, SS Tax revenues have been greater than expenses, but the government has spent it instead of leaving it in an account for Social Security.

3 Avenues to Prepare for Retirement

Save & Invest over the Long TermA. Company Retirement Plan:

401(k); 403(b)B. IRAs: Individual Retirement Account

Roth; TraditionalC. Changes in Social Security: make your

contributions your money not the governments to spend.

Maturing of American Business

Subsistence EconomyCommunity DevelopmentSpecialization & Division of LaborAgricultural & Natural Resource EconomyDevelopment of Industry: The Industrial

RevolutionGrowth of the Services IndustryInformation Industry

Your Future in Business

Getting Work ExperienceGetting Specialized TrainingDeveloping Positive Work Ethics & People SkillsFind something you like doing that pays wellMultiple Streams of IncomeResidual Income or Investment Income

Find out & try it out

The average worker is projected to have 5 to 8 career changes in the next 40 years.

Change is inevitable, be ready for something new.

Find what you like to do that helps others.The more people you help, the more you can earn.

Skill Sets that Are Needed

A. Communication skills in written & oralforms: informing, persuading, technical

B. Math & computer skills for collecting, organizing, analyzing & displaying data

C. Management skills: recruiting, training &team buildingKnowledge is Power, if it is used wisely!

Read pages 23-25

Vocabulary Terms:business business environment database demography e-commerce empowerment entrepreneur factors of production goods identity theftloss nonprofit organization outsourcing productivity profit quality of liferevenue risk services stakeholders standard of living technology

Critical Thinking Questions: Do any 3 of 5.Think beyond the obvious.

• Do you see any conflict between your desire to be as profitable as possible and your desire to pay employees a living wage?

Turn in these during next class.

Chapter 2

How Economics Affects Business:The Creation and Distribution of Wealth

Chapter 2 – Learning Goals

1. Compare & contrast the economics of despair with the economics of growth.

2. Explain what capitalism is & how free markets work.

3. Discuss the major differences between socialism & communism.

4. Explain the trend toward mixed economies.

Learning Goals – continued

5. Discuss the economic system of the U.S., including the significance of key economic indicators, productivity, & the business cycle.

6. Define fiscal policy & monetary policy, & explain how each affects the economy.

How Economic Conditions Affect Businesses

South Korea North Korea$20,000 Avg. income <$1,000

Chinese Taipei China$13,010 Avg. income <$1,000

What are Economic Conditions?

High Unemployment Low Inflation

Taxes International Trade

Government RegulationWorkforce Skills

CapitalMoney & Banking

What is Economics?

Economics studies how society chooses to use resources to produce goods & services & distribute them for consumption among various competing groups & individuals.

Macroeconomics Microeconomicsstudy aggregates individuals & firmswhole economy choices & behavior

Adam Smith

The Economics of Growth – The Wealth of Nations, 1776

Private ownership of land (resources)Keep profits from business or laborIncentives of wealth for providing goods &

services to othersMaking the pie bigger for everyone to prosper

Businesses Benefit the Community

Adam Smith did not believe that business people set out to help others. They worked primarily for their own prosperity & growth.

As people improved their own situation in life (quality of life), their efforts helped grow the

economy. The “invisible hand” of self-directed gain turns into social & economic benefit for all.

Free-Market Capitalism

Resources owned by individuals & firmsnot by governments

Production decisions are made to make profits

No country is purely capitalist; government act as referee, guide, or arbitor

The Basics of Capitalism

The right to own property

The right to own a business & keep the profits

The right to freedom of competition

The right to freedom of choice

Market at Work

Suppliers Decidewhat to producehow to make itwhere to sellwhat price to setwhat services to offer

Consumers Decidewhat to buywhen to buyhow much to buyhow to finance who to buy it from

How price is set

Supply Curve Demand Curve

Price S

DQuantity

Pe

Qe

The Supply Curve Shows

The combinations of options for the quantity supplied (produced) at any set price.

Suppliers will have less incentive to produce in large quantities unless the price per item is higher than the costs of production. As price goes up, quantity supplied goes up, also.

The Supply Curve has a positive slope S

The Demand Curve Shows

The combinations of options for the quantity demanded (purchased) at any set price.

Consumers will have less incentive to buy in large quantities unless the price per item is lower due to budget restraints. As price goes up, quantity demanded goes down.

Market Equilibrium Point

The price at which the quantity demanded equals the quantity supplied.

How do firms find this price and know how much to produce?

Competition within Free Markets

Monopoly: one firm controls supply & price

Oligopoly: few firms compete for market shareprice & decisions of one firm affects others;when 4 largest firms control 40% of the market

Monopolistic Competition: differences in similar products limit substitution: quality, style, etc.

Firms have some control over price.

Perfect Competition: many buyer & seller; no one buyer or seller has much affect on price.

Capitalism

Internal ethics External regulationresponsibility accountabilityhonesty contractual dutyfair return maximize profitreputation wealthsocietal norms legal norms

Free Market

Benefits Disadvantagesquality income inequalityfair price class politicsgood service greed/short termincentive to work capture theory

Benefits & Limitationof Free Markets

Benefits:

Competition between firms; efficiency & customer service

Opportunity for the have not to become the haves

Limitations:

Wealth inequality

Success requires: vision, hard work, smarts, relationship building, time & luck

Sometimes mistreatment of workers, slavery

Command Economy

Socialism

Communism

Socialism

Most basic business owned by governmentsteel mills, oil production, utilities, coal mines, public transportation, etc.

Smaller business may be owned by individuals, but are heavily taxed to pay for social programs. (60% Tax Rate)

The top U.S. Marginal Income Tax Rate of 35%The top Marginal Corporate Tax Rate is 39%

Benefits & Limitation:of Socialism

Benefits:

Free Health Care & Education (through college)

Redistribution of Wealth

Greater income equalityWhy do so many Eurpoean nations have a monarchy? Are power elite groups found in Socialist countries?

Limitations:

Extremely high tax rates

Economic disincentive

The “Brain Drain”Emigration to find more opportunity & freedom

Unsustainable System

Communism

Most resources & firms owned by governmentDecisions of what and how much to produce are

made by the government.This type of economic system is becoming more

rare. Lack of incentives and slow economic growth

Mixed Economies

CapitalismCommunism

Mixed Socialism Economies

Personal Governmental Freedom Control

Economic System of U.S.

Key Economic Indicators:

GDP = Gross Domestic ProductReal GDP; Per Capita Real GDPPurchasing Power ParityUnemployment RateInflation/Deflation: Price Indexes; CPI, PPI, WPI, PCEProductivity

The Business Cycle

The ups & downs of the economyworst = depression = 6+ quarters of decline

in GDPPoor = recession = 2 to 6 quarters of decline

in GDPRecovery = GDP growth < 5% or so

Boom = GDP growth > 5%

Stabilizing the Economy

Fiscal Policy: government actions to stimulate or slow the economy; Tax/SpendBalanced Budget or Surplus Revenue (13:70)Debt Increases or Deficit Spending (57:70)

Monetary Policy: federal reserve actions to stimulate or slow the economy Interest rates: The Discount RateThe Money Supply: increase or decrease

Read pages 52-54

Check Vocabulary Terms:brain drain business cycles capitalism command economies communism CPI deflationdemand depression disinflation economics fiscal policy free-market economies GDPinflation invisible hand macroeconomics market price microeconomics mixed economiesmonetary policy monopolistic competition monopoly national debt oligopoly perfect competition PPI recession resource development socialism supply unemployment rate

Critical Thinking Questions: Do 1 or 2.

Check out BEA & BLS website (see page 56)What does BEA & BLS represent?

Chapter 3 Goals:Competing in Global Markets

Discuss the growing importance of global markets

Explain the importance of importing and exporting, and understand key terms used in global business.

Illustrate the strategies used in reaching global markets and explain the role of multinational corporations in the global market.

Goals continued…

Evaluate the forces that affect trading in the global markets.

Debate the advantages and disadvantages of trade protectionism.

Discuss the changing landscape of the global market and the issue of offshore outsourcing.

World Population by Region

North America 7.9%South America 5.6%Africa 12.7%Europe 12.5%Australia 0.5%Asia 60.8%

12.5%

Economy Types

Subsistence Level EconomyGathering basic needs

HuntingFishingForaging

Self-sufficient farming

Agricultural Economy

Farming dominates economyExcess harvest tradedNext year’s seed keptFood supply allows time for other pursuits

Planning/BuildingLeisure time/Recreation/Travel

Prosperity & Release of excess labor

Industrial Economy

Absorbs former agricultural laborInnovation and invention leads to new productsGrowth & diversity of opportunities/job

Need for labor & raw materialsDevelopment of transportation & communication

Educational system developed

Services Industry

Financial Repair/MaintenanceCommunication TransportationLegal Health/MedicineEntertainment Rental OptionsEducation Options

Importing & Exporting

What are some reason for trading with other countries?

What are some of the disadvantages of importing?

What are some of the disadvantages of exporting?

Absolute & Comparative Advantage

Absolute AdvantageSkills and/or resources of one group give it an advantage.

If the president of a firm could out type all the typists, he would have an absolute advantage in this skill.

Comparative AdvantageA skill or resource could be used to give an advantage, but to do so a more productive activity may be lost.

Should the firm’s president type all company letters?

What Product & Services are a Good Fit?

Canada Europe

South America Africa

Australia Asia

Balance of Trade & Payments

Trade Deficit Trade Surplusimport > exports exports > imports

Balance of PaymentsForeign Investment

$I > $E $E < $IHolding $$$ for international markets

Dumping & Protectionism

Dumping is sending excessive amounts of a product to a market at lower prices in order to drive out competition.

Countries that believe unfair trade practices are being used to capture market share have several ways to retaliate or seek to control the market. Tariffs, WTO, Quotas on imports

Strategies for reaching Global Markets

Licensing Exporting

Franchising Contract Manufacturing

Strategic Alliances Foreign Direct Investment

International Joint Ventures

Forces Affecting Tradingin Global Markets

Sociocultural Forces

Economic & Financial Forces

Legal & Regulatory Forces

Physical & Environmental Forces

Unions, Tariffs & Protectionism

American SteelDominanceForeign CompetitionDumpingProtectionismInnovation &

Revival of the US Steel Industry

WTO = World Trade Organization

1948 – 23 nations: GATT formed reduce trade restrictions

1986 – 124 nations: the Uruguay Roundmodified GATT

1994 – US Congress approved; Avg 38% drop in tariffs

Common Markets

Trading Blocexternal tariffsno internal tariffs

EUSouth American Common Market

or Mercosur

NAFTA

Eliminate trade barriersPromote conditions of fair competitionIncrease investment opportunitiesProtect and enforce intellectual property rightsEstablish framework for further cooperationImprove working conditions

Results of NAFTA

Predicted US Job LossCapital leaving the US

New markets for US goodsCreate opportunites & job in the long term

USA, Canada & Mexico, economic partners

Offshore Outsourcing

Ethics

Rational

Objective

Consequences

What about reverse outsourcing? Do other lose as we gain jobs?

Economic & Business

Economic Cycles3-5 yr 7-9 yrs 13-15 yrlonger cycles

Cycles affect how resources get to businesses.

Productivity

Effective & Efficient use of time, labor &resources = CELL

C = Capital: physical & humanE = EntrepreneurshipL = Land (resources)L = Labor

Quintiles of Income per year

Q1 LOWEST 20% < $22,000Q2 Lower middle 20% $22k-40kQ3 MIDDLE 20% $40k-67kQ4 Upper middle 20% $67k-100kQ5 HIGHEST 20% >$100k

Top 1% >$300,000

Chapter 4

Demonstrating Ethical Behavior &

Social Responsibility

If only…

I knew the consequences of my actions beforeI did them.

Choices are a two for one deal,for each choice (which you can choose) is connected to a consequence(which you cannot choose).

Ethics is more than legality

Behavior that is accepted as right versus wrong.Social Norms: The Ten Commandment

The Golden Rule

The Rule of Law:More narrow than ethics. Laws allow someone to do something that is not illegal, but may be dangerous or not beneficial. Laws written to control whom?

Ethics Begins with Each of Us1. Is it legal? 2. Is it balanced? (fairness)

Setting Corporate Ethical Standards IMSA = Insurance Marketplace Standards AssociationIMSA becomes C E F L I

• The CEFLI standards: Maintain policies and procedures that demonstrate a commitment to honesty, fairness and integrity in all customer contacts involving sales and services for individual life insurance and annuity products.

• Emphasize to all employees and distributors the concepts of ethical market conduct through ongoing communications programs.

• Review our advertising materials regularly to assure that we are honest and clear. • Examine our sales materials continually to see that they are current, accurate and in

accordance with current laws and regulations. • Monitor the sales process carefully, on a regular basis, and obtain and respond to

customer feedback. • Engage in fair competition consistent with state and federal laws, and communicate this

practice to employees and distributors involved in the sales process.

Compliance versus Integrity

Compliance IntegrityConform to outside standards Conform to outside standards &

Chosen Internal StandardsLaws & RegulationsAvoid Criminal misconduct Enable responsible employee

conductLawyers lead compliance Manager lead compliance with aid

from lawyers and others

Methods: Education, reduced Education, leadership, accountability,employee discretion, controls decision processes, controls && penalties penalties

Whistle-blowers

Phone lines to report compliance violations or suspected infractions or customer complaints.

2002 – Sarbanes-Oxley ActCorporate & Criminal Fraud Accountability Act

Supplier, subcontractors, distributors & cusstomers must be told about the ethics program

The ethics code must be enforced

Whistle-blowers must be protected by firm.

Corporate Social Responsibility

American Economist, Milton Friedman said,“The only social responsibility of businesses is to

make money for their shareholders.”Anything more than this moves an economy

toward socialism.CSR – businesses owe their existence to the

society they serve. Benevolence was the highest virtue - Adam Smith

CSR

If corporation take care to benefit their societies in the long run, if the society prospers and employees are retained by ethical firms more easily.

Corporate Philanthropy Corporate Social Initiatives

Corporate Responsibility Corporate Policy

To Customer

Quality product (Lemon Laws)Trial possession (Autos)Return policyRecalls & quick solutionsService (Customer-friendly)

To Investors

Profit and profit-sharingEthical behavior

Firm’s financial report gives investors informationMust be accurate & timely

Insider Trading: IllegalFair Disclosure to all, not just a few, at the same time.

To Employees

Job creationGrowth of firmPeople need to see that

integrity, hard work, goodwill, ingenuity & talent pay offSalaries & benefitsWork environment: Safe, Pleasant, Positive

Being treated fairlyleaders lead rather than manage

Business relations become a dialogue, not a monologuereduces confrontations and animosity between management & workers

To Society & Environment

Create new wealth1/3 of American worker receive salaries from nonprofit organizationsreceive funding from business:

directly or indirectlyCommunity Volunteers & FoundationsHow business is done: Environmental Safe

chemicals, processes, waste managementresource management

Social Auditing

Evaluating the firm as a systemprogress toward implementing socially responsible program & responsiveness to social concerns

Socially conscious investorsEnvironmentalistsUnion officialsCustomers

If companies are not responsive to these stakeholders, then laws or the courts may step in to correct a situation.

International Ethics &Social Responsibility

China – product made by prisoners

USA – Sweatshop & smuggling workers into USA

Nike – Repairing Corporate Imagedeveloping a common inspection system with other firms.